Per the US Department of Labor, a 1 % higher 401k plan fees and expenses could reduce your balance at retirement by 28% over a 35-year career. That’s a big deal!
The irony is people are paying hefty fees to find ways to reduce fees. Follow this guide to lower your retirement plan costs and boost your retirement savings. The three most common fees you will see in your 401k or 403b account are:
1. Administrative fees
These fees are charged by the entity (bank, brokerage, financial institution) that manages your 401k plan. It is used for maintaining the website, and other expenses necessary to keep your account up and running. Some employers will pay this fee for you while others will pass it on to you either as a flat fee or a percentage of your total balance.
We are not suggesting to look for a new job if your employer is not picking up these fees. However, it would be helpful for you to know how much is being charged and you’re not surprised on your retirement day!
2. Service fees
These fees are levied by the trustee and are incurred for services such as rolling over your 401k investments to an IRA, approving a loan from the 401k account or other financial advisory services. So before you do anything other than reallocating investments within your 401k, check how much fees you will incur.
3. Investment fees
Investment fees are charged by the institution that manages a specific fund or investment. For instance, if you buy shares of a mutual fund through your 401k, the mutual fund provider charges an investment fee to cover its expenses of managing that fund. Information on these fees is explained in fine print in the fund’s prospectus.
A rule of thumb, an actively managed fund (where somebody’s job is to choose investments and buy and sell them) will generally have much higher fees than a passively managed one (where the fund typically mirrors an index of some type). Therefore, investing in index funds and index ETFs will keep your investment fees lower.
Law requires fee disclosure. Under the fee disclosure rule, the US Department of Labor requires plan administrators to mail you a quarterly statement showing your investments’ rate of returns, fees, and expenses, including any amounts deducted from your account to cover administrative fees. Look out for that!
Plootus performs a complete analysis of the investment options and chooses the lowest fees and best performing funds from your 401 (k) plan. It is available for download from the Apple and Android app stores. It also suggests how much to save for a happily ever after.
So the next time you pick up your phone to look at Facebook News Feed updates, it may be worth your time to download at Plootus, a ‘financial advisor’ at your disposal.
Don’t worry if you are not a finance professional or have not done that before! We will take baby steps.
Until next time!
Author: Sunil Gangwani, Co-Founder, Plootus